Buy-Sell Agreements: The Document That Decides What Your Business Is Worth When It Matters Most

A buy-sell agreement is not a contingency document. It sets the rules of value transfer at the moment your business is worth the most to someone else and you have the least ability to negotiate. And if yours is a corporate entity-purchase structure funded with life insurance, the 2024 Connelly decision changed the estate tax math underneath it.

The Structure You Chose Carries Tax Consequences

The two dominant structures are cross-purchase and entity-purchase (also called a stock redemption). In a cross-purchase, co-owners buy each other out directly. In an entity-purchase, the business redeems the departing owner's interest. Each carries different income tax consequences, different step-up-in-basis outcomes for surviving owners, and different balance-sheet effects on the company.

Which one fits depends on your entity type, the number of owners, and whether life insurance funds the buyout. That last variable is where the analysis recently got harder.

What Connelly Changed

In June 2024, the Supreme Court decided Connelly v. United States. The Court held that life insurance proceeds held by a corporation to redeem a deceased shareholder's stock must be included in the corporation's value for federal estate tax purposes, and that the redemption obligation does not offset that increase in value dollar-for-dollar.

The practical consequence: a deceased owner's estate can face a larger taxable estate than the family expected, because the insurance proceeds inflate the company's fair market value before the redemption occurs. Structures that looked clean on paper in 2020 may now create an unintended estate tax liability.

This is not a reason to avoid life-funded buyouts. It is a reason to revisit which structure funds the buyout and how the agreement is drafted, with counsel who knows the post-Connelly landscape.

The Other Problem: Stale Valuation Formulas

Owners who do have an agreement often have one written when the business was a fraction of its current size. A fixed-price formula or a multiple negotiated at formation can leave a departing owner dramatically undercompensated, or force the surviving owners to overpay at exactly the wrong moment.

Valuation provisions that hold up require a periodic third-party appraisal, specify which standard of value applies (fair market value, fair value, strategic value), and address what happens when the parties cannot agree. Inside the Sporos Doctrine, this is Soil layer work: the structural decisions made before the liquidity event, not during it.

The Takeaway

The one fact that decides your exposure is where the funding insurance is owned. Entity-owned changes the estate calculation after Connelly. Individually owned inside a cross-purchase generally does not. Most of the rest of the review follows from that answer.

The failure I see most often is not a missing agreement. It is a well-drafted one nobody has touched in a decade, funded by a policy sized to a valuation the business passed years ago, with an appraisal clause no one has triggered. Every party signed in good faith, and the document is now quietly wrong about the number that matters.

If the ownership question and the valuation question have not both been answered recently, they are worth a conversation before anyone redrafts language.

The information provided is for educational purposes only and does not constitute investment, legal, or tax advice. Consult with qualified professionals for guidance specific to your situation.